Pay for Performance Through Bonuses, Not Salary

Tie Pay for Performance bonuses into company goals

You can, in fact, pay for performance with bonuses. That’s pretty much what you should be paying for. The primary criteria for a bonus is last year’s performance.

Most pay for performance bonuses are tied of course into objectives that you have surrounding the job that are tied into larger corporate objectives. And there is usually some kind of categorization that allows you to be in the money, be solid in the money or to really have a wonderful year and be knee deep in the money. And those are usually based on some kind of objective criteria that you subjectively select for how the business is going to pay out. You can do that type of pay for performance without much trouble.

It’s not often the point of contention. People may say, “Well, I should have never let you set the threshold so high” or “That wasn’t fair, I don’t like where that number was set; it wasn’t my fault that we didn’t get that job.” But they don’t argue with the same vigor here as they might about other things. There are a lot of different schemes and formulas for bonuses. It’s a separate topic, and a separate module to talk about pay for performance and bonuses. Be very careful. It is extremely easy to sub-optimize your pay for performance bonuses. In other words, to get what you ask for, what you pay for instead of what you really want. So, be careful about inventing elaborate schemes for pay for performance. If you’re trying to do that through money, be careful.

And every once in a while a really well intentioned, client will say, “We’re going to pay people to do catalytic coaching. We’re going to pay them to develop themselves.” The reward for being developed is being developed. You actually paid employees to develop themselves. You don’t need to reward employees to develop themselves; the reward is being developed.

It’s acceptable to pay people to develop their staff and their direct reports if you want to do that. If you want to incentivize that, pay extra for people for people who do an extra good job or just comply. If you’re trying to drive some behavior, that’s great. But I would not include personal development goals on the list of things I would bonus because if you don’t want to develop yourself, that’s going to cut you twice.

Bigger measures are more effective for a pay for performance plan. When you look at bonuses, the more departmental they are, the more individual they are, the more likely you’re going to sub-optimize. So, be careful. Bigger things are better. Concrete measures or something that has numbers attached to it are better than just making it up. It’s not just somebody’s opinion. It either did or didn’t make the sales volume, either did or didn’t make the profit margin, either did or didn’t reduce the quality number, something concrete.

If you have the ability to put together a profit-sharing program, that’s a form of bonus that normally is considered for people who aren’t bonus eligible under normal schemes. If you can do that, it’ll get everybody organized around the big picture.

Edited Remarks from “How to Drain the Drama from Salary Reviews: A Conversation Roadmap” by Gary Markle

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